The Trader Mindset
Stockscores.com Perspectives for the week ending March 29, 2009
In this week's issue:
I want to be very clear about what I do. I am a trader.
I am not an investor. I do not care about what company's do, who manages them or how good their balance sheets are. I do not read the business section of the newspaper and I do not listen to what "experts" on television say about the companies they follow. I will never read an annual report or try to understand the content of a news release.
My success should not be judged by the wisdom of my words or whether I am right or wrong and by how often. There is only one gauge of success for a trader; profit and loss.
As a reader of this newsletter or a user of Stockscores.com, you need to make that distinction too. Traders make their money from being on the right side of price moves. No trader can expect to always be right, good traders may not even be right more than they are wrong.
Good traders make more when they are right relative to what they lose when they are wrong. They know how to play the probability game that is stock trading.
Consider my two featured stocks from last week's newsletter, V.LGC and WGAT. I know nothing of what either company does; I featured them only because their charts told me that they had a good probability of making money in the short term. One week is not enough time to yet make that judgment but let's do some analysis for fun anyway.
I feature V.LGC at $0.20 and established support at $0.14. That meant the risk per share on the trade was $0.06. Therefore, a trader who was willing to take $500 in risk would have bought 8000 shares with a total cost of $1600 (I recognize that you would have had to do this on Friday just before the close as it gapped up on Monday morning … that is why you have to learn to do this sort of thing yourself!).
V.LGC closed on Friday at $0.33 providing a $0.13 a share profit thus far, although there has not yet been a signal to exit the trade. For the $500 in risk there is now about $1000 in profit, meaning that this trade has a 1 to 2 risk reward ratio.
The other stock that I featured was WGAT which closed last Friday at $0.40 with support at $0.27. That means the position with $500 in risk would be 3800 shares and a total capital outlay of $1520. The stock closed this Friday at $0.335 so this position is currently down $247.
The success rate so far is 50%. Together, these trades took up about $3100 in capital and combined are up $750.
As a trader, I do not judge my success by the result of each trade. What I look for is what the average risk to reward ratio over a number of trades is, at least 10 but more is better. I want that average to be greater than 2 although this will also depend on the success rate of the strategy.
There are many people who will avoid buying low priced stocks because they relate low price with company quality. But remember, as traders, we should not care about company quality. The only determinant of quality to the trader is whether the stock goes up after you buy it. Many of the stocks that I have made money on over the years are out of business now but I could not care less because I have sold them and moved on.
Consider how many "good" companies have done in recent years. Nortel was once the largest company in Canada, it is not trading for pennies. Lehman Brothers is gone, Bear Stearns was sold for nearly nothing. General Motors, once the largest of auto manufacturers is fighting against bankruptcy. Price and quality do not correlate, all that matters is whether you can make money on the trade.
The less you know, the better off you are. The market knows everything and you only need to let it tell you what to do. Buy stocks that are going up, sell stocks that are going down. Most importantly, manage risk through the process so that you do not hold on to big losers. When you are wrong, get out and move on.
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I could not find much to consider trading for Monday, I think the market has a good chance of pulling back in the short term which makes this a good time to watch the positions you have.
So, I thought I would go through the last three weeks of my recent featured stocks from this newsletter to emphasize the risk reward concept discussed above. The Daily Newsletter provides these features through the week as well, information on subscribing to it can be found in the Product, Newsletter area of Stockscores.com.Back To Top
1. RNIN
Featured at $1.35. Support was quoted as $1.05. That meant the risk of the trade was $0.30 a share. 1000 shares gives $300 in risk, plus commissions and potential slippage. The stock is currently at $2.15 so the reward is currently $0.80. $0.80 divided by $0.30 is a risk to reward ratio of 1 to 2.67. That means this trade pays for 2.67 losers. Still not signal to exit this trade.
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2. FCX
Featured at $32.21 with support at $26. Risk was $6.21 a share. Currently, the stock is $42.12. With no signal to exit the trade yet, the reward is $9.91 and the risk reward ratio is 1 to 1.6.
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3. STEC
Featured at $5.64 with support at $4.35 for a risk of $1.29. Friday's closing price was $7.53 for a reward of $1.89 so far, making the risk reward ratio 1 to 1.47. This stock gave an exit signal on March 18th on a Bursting Bubble candle (this concept is taught in the StockSchool Pro course) at $8.20 at which point the risk reward ratio was 1 to 2.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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